Question

1] What is the relationship between net income and cashflow from operating, investing, and financing activities for a company.

Answer 1

Answer

Net income of the company is derived from Income statement whereas the cash position is derived from Cash flow statement. For Companies following GAAP there may be substantial difference between there net income and cash from operation, investing and financing. Because these are required to report using Accural accounting principles. However in case of a entity which collect cash and record revenue the difference may be low or nil. For example retailer which collect cash for goods when the sale is made.

There exist a direct relationship in Net income and Income from operation of business. Operating statement of cash flow uses the information from income statement. For example Depreciation is picked from income statement and is added to cash from operation as it is non cash expense. A highly risk averse investors should prefer a Cash flow statement then net income statement because cash inflow is more important for company's success then accrual accounting.

Understanding both the statement makes the picuture very clear about potential and soundness of companies performance.

< Wrote a brief answer as world limit was not prescribed. For any doubt on concept part feel free to ask in comment section >